NASA IG: Agency Accepted Too Much Financial Risk in Orbital’s CRS Contract

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NASA’s Office of Inspector General has issued a report saying the space agency has taken on too much financial risk in Orbital Sciences Commercial Resupply Services (CRS) contract by funding future missions before the company has demonstrated the capacity to deliver cargo to the International Space Station.

Although we do not second guess NASA’s decision to concurrently fund up to three rocket systems given the critical need for additional ISS resupply capabilities, in the case of Orbital, NASA will fully or partially fund six rocket systems under the CRS contract before Orbital has fully demonstrated its spaceflight system.

In our judgment, NASA has been too slow to adjust its payment schedule to Orbital under the CRS contract given the substantial slippage in the launch schedule for the company’s resupply missions. As such, given the risks inherent in concurrent development, we question NASA’s decision to pay Orbital approximately $150 million for costs associated with their fourth and fifth resupply missions. We believe NASA should have deferred this amount to future fiscal years in order to avoid spending funds too far in advance of each mission’s launch dates.

The basic concern is that Orbital’s Antares rocket and Cygnus freighter will encounter major technical issues when they fly a cargo demonstration mission later this year that will result in costly changes to systems already being built.

Out of a need to ensure a redundant cargo capacity, NASA funded development of SpaceX’s and Orbital’s spaceflight capabilities under the COTS Program while concurrently funding fabrication of the companies’ spacecraft under the CRS contracts. As a general matter, procuring rocket systems prior to a successful system demonstration flight substantially increases financial risk as major technical problems may be encountered during final testing and demonstration. Although CRS activities are not contractually tied to a successful
demonstration flight, as Orbital’s COTS development activities slipped so did the anticipated launch dates for its CRS missions.

Antares flew what Orbital has called a perfect maiden flight in March, but Cygnus has yet to fly. A demonstration flight during which Cygnus will berth with the International Space Station is set for August or September.

The report points out that SpaceX’s has experienced problems with its Falcon 9 launch vehicle and Dragon spacecraft on one demonstration and two cargo flights to ISS, although all the missions succeeded in their primary objectives. On one flight, a secondary payload was placed into the wrong orbit.

The report indicates that NASA has been responsive to the IG’s concerns, although the space agency’s actions to date have not satisfied the agency’s watchdog.

We discussed with program officials our concerns about these advance procurements and they recognized the need to slow down the pace of NASA’s payment for Orbital’s rocket systems production. For example, officials said they tied future Mission 4 and 5 payments to an adjusted launch schedule and completion of ISS integration activities by the company.9 While we appreciate that NASA has taken these steps, we believe the Agency has accepted too much financial risk by funding Orbital’s fabrication of rocket systems for Missions 4, 5, and 6 so far in advance of the time needed to meet the ISS resupply schedule and prior to Orbital completing a successful system demonstration flight.

NASA did agree to adjust cargo contracts to reflect schedule slips in the future, although the agency disputed that it had taken on too much risk in the Orbital CRS contract.

To reduce the Agency’s financial risk, we recommended that the Associate Administrator for Human Exploration and Operations Mission Directorate ensure that contractual agreements for the commercial cargo providers are updated to reflect the lead times required to meet any revised launch dates. If launch dates slip, NASA should adjust contract work plans to ensure that the authorized lead times and NASA payments reflect the revised schedules. In response to our draft report, the Associate Administrator concurred with our recommendation. We consider the Associate Administrator’s proposed actions to be responsive to our recommendation and will close the recommendation upon completion and verification of the corrective actions.

While the Associate Administrator concurred with the recommendation, he disagreed that NASA has accepted too much financial risk in the way it has implemented the Orbital CRS contract. He stated that NASA determined that the programmatic risks of not starting hardware development needed for cargo resupply were substantially greater than the financial risks posed to the Agency by doing so. He further stated that NASA uses existing payment cap protections and other contractual provisions to reduce financial risks and align payments with technical performance.

A longer excerpt from the IG’s report with footnotes follows:

NASA has paid Orbital a total of $910 million as of the end of FY 2012, including funding for both development efforts under its COTS Space Act Agreement and CRS contract. Under the current payment schedule, the company is on track to receive up to 70 percent of the funds associated with six of its eight CRS missions prior to having flown a demonstration flight.

Orbital successfully completed a maiden test flight of its Antares rocket on April 21, 2013, but the full demonstration flight required under the COTS Program most recently scheduled for June 2013 has slipped to August or September 2013. NASA and Orbital officials noted the maiden flight has reduced technical risk and that the costs of any system modifications needed as a result of the demonstration flight will be borne by Orbital given that the CRS contract is fixed price. Nevertheless, the possibility remains that the demonstration flight could expose issues that require costly rework and redesign, resulting in major adjustments to the current CRS launch schedule.

Out of a need to ensure a redundant cargo capacity, NASA funded development of SpaceX’s and Orbital’s spaceflight capabilities under the COTS Program while concurrently funding fabrication of the companies’ spacecraft under the CRS contracts. As a general matter, procuring rocket systems prior to a successful system demonstration flight substantially increases financial risk as major technical problems may be encountered during final testing and demonstration. Although CRS activities are not contractually tied to a successful
demonstration flight, as Orbital’s COTS development activities slipped so did the anticipated launch dates for its CRS missions. Although we do not second guess NASA’s decision to concurrently fund up to three rocket systems given the critical need for additional ISS resupply capabilities, in the case of Orbital, NASA will fully or partially fund six rocket systems under the CRS contract before Orbital has fully demonstrated its spaceflight system.7

In our judgment, NASA has been too slow to adjust its payment schedule to Orbital under the CRS contract given the substantial slippage in the launch schedule for the company’s resupply missions. As such, given the risks inherent in concurrent development, we question NASA’s decision to pay Orbital approximately $150 million for costs associated with their fourth and fifth resupply missions. We believe NASA should have deferred this amount to future fiscal years in order to avoid spending funds too far in advance of each mission’s launch dates. During the course of our review, NASA took steps to adjust its payment schedule in light of the development delays by negotiating a contract modification in December 2012 for Mission 6 that tied payment to a successful Antares maiden test flight. In our view, NASA instead should have tied payment for this mission to a successful full system demonstration flight. Finally, Orbital requested to begin work on resupply Mission 7 by May 2013, a request from our perspective that, if approved, would result in an additional estimated $70 million in premature payments to the company in FY 2013.8

We discussed with program officials our concerns about these advance procurements and they recognized the need to slow down the pace of NASA’s payment for Orbital’s rocket systems production. For example, officials said they tied future Mission 4 and 5 payments to an adjusted launch schedule and completion of ISS integration activities by the company.9 While we appreciate that NASA has taken these steps, we believe the Agency has accepted too much financial risk by funding Orbital’s fabrication of rocket systems for Missions 4, 5, and 6 so far in advance of the time needed to meet the ISS resupply schedule and prior to Orbital completing a successful system demonstration flight.

Management Action

To reduce the Agency’s financial risk, we recommended that the Associate Administrator for Human Exploration and Operations Mission Directorate ensure that contractual agreements for the commercial cargo providers are updated to reflect the lead times required to meet any revised launch dates. If launch dates slip, NASA should adjust contract work plans to ensure that the authorized lead times and NASA payments reflect the revised schedules. In response to our draft report, the Associate Administrator concurred with our recommendation. We consider the Associate Administrator’s proposed actions to be responsive to our recommendation and will close the recommendation upon completion and verification of the corrective actions.

While the Associate Administrator concurred with the recommendation, he disagreed that NASA has accepted too much financial risk in the way it has implemented the Orbital CRS contract. He stated that NASA determined that the programmatic risks of not starting hardware development needed for cargo resupply were substantially greater than the financial risks posed to the Agency by doing so. He further stated that NASA uses existing payment cap protections and other contractual provisions to reduce financial risks and align payments with technical performance.

We agree that balancing programmatic and financial risk is critical to ensure the success of the commercial cargo program. However, as outlined in the report we continue to believe that NASA has been too slow to adjust its payment schedule to Orbital given the substantial slippage in the launch schedule for the company’s resupply missions.

Footnotes

7 As a point of comparison, NASA had funded or partially funded four missions before SpaceX’s first demonstration mission and five missions before the second demonstration mission.

8 As of June 2013, NASA officials informed us that they have delayed authority to proceed for Mission 7 due to slippages in the CRS launch schedule.

9 Per the CRS contract, ISS integration is “the activities required to ensure that SSP 50808 (ISS requirements document) have been met; necessary hardware and software developments to interface with the ISS have been completed; and joint on-orbit integrated operations plans have been finalized.” Orbital reported completing ISS integration in March 2013.

  • Nickolai

    Interesting read, thank for this Doug.